Answer to Question #166852 in Finance for Bishem

Question

how the following financial risks can be mitigated and managed by the financial institutions

1. market risk
2. operational risk
3. credit risk
4. Liquidity risk
5. Insolvency risk

Answer 1

1) market risk

Banks for example try to mitigate the impact of risk by creating reserves and limits. Market risks are booked in the trading book. Banks tend to inflate reserves for credit risk, to provide cover for market risks that may be hidden.

2) operational risk

Financial institution has to train its employees to prepare for what could go wrong. That is especially true when one of the financial institution’s business units is about to do something new, such as change a customer interface, roll out a new product or service, or outsource its business processes.

3) credit risk

Banks can mitigate the risk by taking steps to strengthen its lending program such as thoroughly check a new customer’s credit record, set a credit limit for a new customer by checking his credit history reports and make sure the credit terms of your sales agreements are clear to your customers.

4) Liquidity risk

Liquidity risk can be mitigated by forecasting cash flow regularly, monitoring, and optimizing net working capital, and managing existing credit facilities.

5) Insolvency risk

Financial institutions should Focus on cash flow, reduce business expenses, Keep creditors in the loop and get good financial and legal advice.